Net operating assets

Net operating assets

Net operating assets (NOA) are a businesses operating assets minus its operating liabilities. NOA is calculated by reformatting the balance sheet so that operating activities are separated from financing activities. This is done so that the operating performance of the business can be isolated and valued independently of the financing performance. Financing activities do not create value unless the company is in the finance industry, therefore reformatting the balance sheet allows investors to value just the operating activities and hence get a more accurate valuation of the company.

Calculation

  •  :NOA = operating assets − operating liabilities

In order to calculate NOA you must reformat the balance sheet in order to separate operating activities from financing activities. Operating activities are anything that involves the day-to-day running of the business such as accounts receivable, inventory, etc; and financing activities are any accounts that are "interest-bearing" or have financial characteristics and are not related to the regular operations such as debt and equity investments. The reformatted balance sheet should look like this:

Balance sheet of XYZ, Ltd. as of ...

OPERATING ACTIVITIES :

Current assets
Current liabilities
 = Net current assets

+ Non-current assets
 
 – Non-current liabilities
 = NET OPERATING ASSETS (NOA)

FINANCING ACTIVITIES

Net financing obligations
Equity

Application

Calculating NOA is necessary for applying the Discounted Abnormal Operating Earnings valuation model. DAOE is one of the most widely accepted valuation models because it is considered to be the least sensitive to forecast errors. NOA can also be used in the calculation of Free cash flow (FCF) and therefore the Discounted cash flow model. However it is not necessary in order to calculate FCF.

  •  :\mathrm{DAOE} = \frac{\mbox{NOPAT (t) - WACC x NOA (t-1)}}{\mbox{WACC}} + {\mbox{NOA}} - {\mbox{BVD}}
  •  :FCF = NOPAT − Change in NOA
  •  :\mathrm{DCF} = \frac{\mbox{FCF}}{\mbox{WACC}} - {\mbox{BVD}}

See also


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